Monthly Archives: September 2008

A Market In Hope And Fear

As I speculated earlier this evening, it seems clear that today’s apparent bounce back in the stock market is based more on hope that reality:

It seemed, by many accounts, a far happier day than the last.

Hours after their worst drop since 1987, stocks reversed course on Tuesday and headed right back up on hopes that lawmakers were nearing an agreement on a bailout for the financial system. The Dow industrials jumped 485.21 points, erasing more than half its loss from Monday. Bank stocks rose sharply, investors were lured out of Treasury bonds, and the dollar soared.

But alarms were sounding elsewhere in the byzantine channels of the global financial system, sending a clear message that the health of the world’s economy remained at risk of worsening.

Even as President Bush and Congressional leaders worked to make a rescue plan palatable to lawmakers, the flow of credit neared a standstill, making it more difficult for businesses to obtain the money they need for routine expenses like utilities and payroll. Banks were still reluctant to lend, despite billions of dollars of cash offered up by central banks around the world. Early on Tuesday, banks were charging one another the highest overnight borrowing costs ever recorded, as measured by an important rate known as Libor.

Even the triple-digit stock rally, spurred by investors’ hopes that Congress will approve a revised version of a bailout plan, represented yet another of the big daily swings that reflect fragility and fear.

“This remains a volatile market,” said Quincy Krosby, the chief investment strategist at the Hartford, a financial services firm. “It remains a market that will move on headlines, on rumor. And it’s a market that has divorced itself from fundamentals.”

But even as the market bounced back, there were signs that the flow of credit was tightening significantly:

[P]roblems in the credit markets were widespread on Tuesday, making it more difficult for businesses and consumers to obtain financing, and driving down the value of assets held by money-market funds.

The interest rate on one-day commercial paper — usually a cheap source of financing for businesses — jumped to 3.95 percent, from 2.24 percent on Monday, pushing up the cost of these short-term loans.

In a sign that banks were increasingly unwilling to lend to one another, the Fed funds rate that they charge each other to get overnight loans to finance day-to-day operations, jumped as high as 7 percent on Tuesday morning — well above the Federal Reserve’s 2 percent target — before gradually falling back.

In the money-market world, institutional and retail investors appeared to be seeking more safety by transferring cash to funds that invest only in government securities, considered among the safest. From Sept. 15 to Monday, $372 billion, or 19 percent of their total assets, flowed out of prime funds. That reduced the amount of money available to corporations that count on these investors to purchase their short-term notes, which help supply their daily cash needs.

“The money markets have completely broken down, with no trading taking place at all,” Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt, said. “Central banks are the only providers of cash to the market; no one else is lending.”

One of the more emphatic arguments that I’ve seen over the past week from people who support the bailout, whether they be pundits, politicians, or economists, is the idea that we need to do this to reassure lenders who are tightening up on credit because many of them are overexposed to mortgage loans, and mortgage-backed securities, of questionable value given the collapse of the housing market. If lenders don’t lend because they’re afraid to, the argument goes, the entire economy will grind to a halt.

Now, there is a certain truth and logic to this argument. A lot of lenders are stuck with a lot of loans that may go belly up in the coming weeks or months. Because of that, they are being much more conservative in their lending practices already. If they tighten up even more, than it’s entirely possible that the economy could be pushed into a deep recession.

But, that doesn’t necessarily mean that at a $ 700 billion bailout is the right solution to our problems.

As I noted on Monday, the bailout bill would not solve any of the problems that we’re facing today, it would not eliminate the pain that will be felt thanks to years of easy credit and easy money policies by the Federal Reserve Board, Congress, Fannie Mae, Freddie Mac, and the rest of the banking industry. All the bailout will accomplish is to spread that pain throughout the economy and delay into some unknown point in the future the day of reckoning that must come for the mistakes that have been made. If the bailout happens, it may mean that the rest of this year, and the next several years will be better than they might have other wise —- but it will also mean that the dollar will continue to fall in value, inflation will increase, federal spending will go up even more than it already has, and the budget deficit and national debt will continue to soar. Someone will pay the price for that, and if the Federal Government takes ownership of the mortgage debacle, that someone will be the American taxpayer.

I honestly don’t think many people are thinking that far into the future, though. The markets are operating based on an insane combination of hope and fear, and the politicians are being guided by the same psychology into passing a bill not because they think it might work, but because they hope it will.

That, my friends, is a recipe for disaster.

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Quote Of The Day — Orwell Would Be Proud

McCain on the Campaign trail, referring to the massive Treasury power-grab:

“The first thing I would do is say, ‘Let’s not call it a bailout. Let’s call it a rescue,’” McCain told CNN. He said, “Americans are frightened right now” and political leaders must give them an immediate solution and a longer-term approach to the problem.

Yes, let’s not call it an enormous power-grab by the Treasury to buy worthless assets for too much money in order to save a bunch of rich folks who made very bad decisions. That’s not a very good spin. How about “A bipartisan Congressional program to restore stability to the economy so that American families can better plan for their future.” That sounds much better.

Sure, call it a rescue instead of a bailout. Put lipstick on that pig, too, but let’s not pretend it’s no longer a pig.

California Taking All The Fun Out Of Driving

First, no phone calls unless they’re hands-free. Now, no texts or emails on my Crackberry…

Starting January 1, 2009 a new law will go into effect where writing, sending, or reading a text-based communication while driving will be against the law for all drivers in California.

This new law applies to electronic wireless communications devices used to manually communicate with any person using text-based communication, including, but not limited to, communications referred to as a text message, instant message, or electronic mail.

Violating this law is punishable by a base fine of $20 for a first offense and $50 for each subsequent offense. With the addition of penalty assessments, fines can be more than triple the base fine amount.

I suppose this won’t apply to those enforcing the law, though.

Thoughts On The Bailout

A few days ago, I tried to explain, in layman’s terms, how we ended up in this financial mess. I had this to say about the bailout:

We can debate whether or not this bailout should or shouldn’t occur (for the record, I’m against it), but in an election year, there’s nothing that’s going to derail this monster.

And it looks like today’s news proves that analysis correct momentarily premature. It’s clearly not in “stick a fork in it” stage yet, and you know that round 2 is on its way and will not be deterred.

So there’s still time to call it a stupid decision. I don’t have the time to devote to that today, so I’ll turn you over to the ever-talented Warren Meyer of Coyote Blog, who skewers the bailout plan. As they say, read the whole thing.

How Richly Ironic

The House of Representatives is set to put yet another nail in the coffin of the free enterprise system on the 127th annversary of the birth of one of it’s greatest defenders.

UPDATE (Brad Warbiany): Note — This post was written early this morning, before the bailout was shot down in the house. The WaPo link simply updated to the story denoting the failure.

When Ron Paul Is Right, He’s Right

I’ve been fairly critical of Ron Paul’s political instincts, especially his recent decision to endorse Chuck Baldwin for President, but when it comes to the impending Paulson-Bernake bailout, he’s one of the few voices in Congress talking about what’s really at stake.

Here’s video from the Joint Economic Committee hearing late last week:

And here he is on Fox with Neil Cavuto:

The consequences of this bailout are something that nobody is talking about, but which we’ll all have to deal with. For all his faults, Ron Paul is one of the few people on Capitol Hill talking about the consequences of this bailout over the long-term.

Weekend Open Thread: Presidential Debate Drinking Game

We’ve already seen one debate between McCain and Obama. And frankly, although I was drinking beer at the time, I was far too even-keeled to be able to take this nonsense. We’ve got two more of these, and we need something to make it a bit more interesting.

So I propose a Presidential Debate Drinking Game!

Terms of the open thread are as such: post any rule that you think is necessary for the game. I’ll start:

Take a drink for any time McCain refers to Ronald Reagan.

Who’s next?

Ron Paul & Bob Barr: It’s Time to Unite!

Whether you consider yourself a libertarian (big “L” or small “l”), classical liberal, a Barry Goldwater/Ronald Reagan/Ron Paul Republican, Objectivist, or just simply want less government and more freedom we should always remember that there is far more which unites us than divides us. This is not to suggest that these finer points of these philosophies are not important—they are. The foes of liberty in the Democrat and Republican Parties want us to be divided. As long as we fight amongst ourselves, we are marginalized and they win. I think George Phillies said it best at the ’08 Libertarian National Convention: “The enemy is not in here, the enemy is out there!”

The liberty movement is much bigger than the Libertarian Party, Ron Paul, Bob Barr, Lew Rockwell, Cato, or Reason. All have made an invaluable contribution to the cause of liberty and should be applauded for their efforts. Let’s not lose sight of the big picture.

The Global Financial Margin Call

Leverage:

4. the use of a small initial investment, credit, or borrowed funds to gain a very high return in relation to one’s investment, to control a much larger investment, or to reduce one’s own liability for any loss.

For an investor, margin is a blessing and a curse. When you’re trading on margin, your returns can be very high, but it only takes small losses to wipe you out completely. It’s the problem of leverage. If you invest $1000 but your brokerage is giving you 5-to-1 margin, you effectively invest $5000 instead of $1000. Thus, a 20% return nets you $1000 profit instead of $200. But it’s a problem in the opposite direction too. A 20% loss loses you $1000. You now have a $4000 loan from the brokerage, and the total position of your holdings– if liquidated to pay off your loan in a margin call– will leave your position wiped out.

Margin, for an individual brokerage and an individual investor, can be a very useful tool. Yes, it’s a big risk, but it carries big rewards. It allows the investor to play a large position with a limited exposure, and allows the brokerage to make very liquid loans when they have excess capital.

When margin requirements get very loose, though, and the practice becomes widespread, it becomes scary. Gains happen quickly, as the money moving in the market gain velocity. Losses are worse. If a brokerage has a lot of investors working on margin, a bear market may force them to initiate a margin call on a lot of investors, and their exit of the market can further reduce demand and drive down prices. Thus, each brokerage is in a race to exit the market, and the market crashes — as we saw in 1929.

Leverage is not a bad thing. Without leverage, most people couldn’t afford a house. We don’t save the full price of the house, we save a modest down payment, borrow the rest, and then watch as our 10% down payment reaps the rewards of 100% of the gains of the house price. In a down market, because houses rarely drop more than 10% or 20% in a down market, it’s rare that a price will drop enough in a short period of time to liquidate our down payment…

Enter subprime and alt-A. When lending standards decline, offering houses to people with no money down, the leverage becomes nearly infinite. If I can buy a $400K house with no down payment– only covering closing costs– I now have the ability to make a huge reward with very little risk of my own. It doesn’t take a 10% drop in housing prices for me to be underwater on my investment, but a 10% increase on that house is $40K in profit.

Leverage increases the rate of gain as well as loss. When subprime lending became widespread, everyone was buying on margin and bidding up the prices of homes to obscene levels. The market was crowded not only by homeowners, but by speculators looking to “flip” houses for a quick profit. The rapidly escalating prices was a false signal to homebuilders, who believed that demand had shot up and tried to build houses to meet the demand. The market went up with no signs of stopping — and then it stopped.

As all bubbles do, eventually the perma-bulls have nobody to sell assets to except other perma-bulls. The market can go nowhere but down. At that point, everyone who is leveraged is in big, big trouble. In this case, the market was leveraged top to bottom, and we’re looking at a financial catastrophe unlike few people today living have ever seen.

I said we were leveraged top to bottom, but so far I’ve only spoken about the homebuyers and lenders. It goes far deeper than that. Investors lending out their own money have a responsibility to ensure that they’re lending to creditworthy borrowers. Even if it’s not “their own” money, they usually have to carry those profits and losses on their own balance sheet, and thus it’s their responsibility (often with their job on the line) to ensure the money is handled responsibly. But in this case, the incentive of the lenders was to “churn” loans, because every loan was carried by someone else. The loans were packaged into CDOs– Collateralized Debt Obligations– securities grouping these toxic loans into equities sold to institutional investors who were far more liquid than the banks or the homebuyers.

Even worse, many of those institutional investors were working on their own version of margin, CDSs– Credit Default Swaps. A CDS is an insurance policy against default. If I buy $1B worth of securities, with a worry about losing my entire position in a big default, I can insure my position against default for a much smaller amount. I can then assume that my $1B investment is no longer “exposed”, and go out making another billion dollar investment as if the first billion doesn’t even exist. I’m covered — as long as my counterparty selling me the CDS can remain solvent.

So everyone’s leveraged to the max, top to bottom. How did it get this way? This post isn’t intended to assign blame, but as I’m sure many of you know, I think the government deserves quite a bit of responsibility for its easy-money policies, Fannie and Freddie, and the CRA. Then, of course, there were a lot of investors who got swept up in the “good times” thinking nothing could go wrong, and many of their technical investing brethren who assumed that the new CDO and CDS products would work to improve stability instead of just allowing the bubble to reach historic proportions before bursting. And there’s the old-fashioned greed, by lenders who want to refinance everyone they meet and homebuyers who either bought more than they could afford or treated their homes like ATMs. This one’s big enough that there’s plenty of blame to go around.

So what’s happening now? The global financial margin call. This leverage has to unwind, and the way that happens is going to cause a lot of pain no matter what happens. It would have been easier if everyone just held on through the crisis. But these financial institutions are in a prisoner’s dilemma writ large; if none of them write down the assets and try to de-leverage, they’re all able to weather the storm, but if any of them de-leverage, the firms to do it first get off the lightest. Plus, with mark-to-market rules forcing them to write down the losses, they’re hand is forced. We’re at the point where everyone’s in the process of trying to get out, and the whole system is nearly ready to come crashing down.

And why is the government stepping in? Because the credit markets are frozen. An institutional investor isn’t going to take a big risk right now if they can’t hedge that risk. They’d love to use a CDS to protect themselves, but nobody believes the counterparty selling a CDS is solvent enough to live up to its obligations. AIG is a perfect example. As the largest holder of these CDS contracts, there was no way they could effectively live up to their counterparty obligations, and allowing them to fail would unravel the whole egg in a very fast manner. Thus, the government stepped in and said that nobody has to worry, because if push comes to shove, the US Treasury will be that counterparty. And nothing’s more trustworthy than the US Dollar and the US Treasury, right?

There’s an old adage when it comes to economics: “If you owe the bank $5,000, that’s your problem. If you owe the banks $100,000,000, that’s the bank’s problem.” The problem with being “too big to fail” is that failing hurts the people you owe a lot more than it hurts you. This is where the bailout is coming from, because companies like AIG will cause so much havoc when they fail that we can barely understand the potential implications.

We can debate whether or not this bailout should or shouldn’t occur (for the record, I’m against it), but in an election year, there’s nothing that’s going to derail this monster. What’s important right now is to understand the potential implications. So here’s the possibilities:

Best Case: The whole point of the government intervention isn’t really to fix the situation. This situation can’t be “fixed” in that sense. The system is over-leveraged, and that has to work itself out. The issue is that if it occurs quickly, we’ll have a level of pain that this country is not ready for. If it occurs slowly, we might have a protracted recession and a dull nagging ache, but eventually the economy will grow its way out of the mess. We’re talking a 5-15 year process, but they may stave off double-digit unemployment and bread lines.

Worst Case: Government doesn’t solve the problem, and we still go into a depression. In order to get out of it, and to try to keep the economy moving, they inflate the dollar to try to give the appearance of growth, but America doesn’t buy it. The world abandons the dollar as a reserve currency, and we enter a hyperinflationary depression along the lines of 1920’s Germany.

Even the best case is not good, but the worst case is downright terrifying. But whether or not you support this bailout, I hope this post explains the underlying causes and issues at stake here. We’re in uncharted territory, and the Sword of Damocles is dangling just above. No politician wants to let that sword fall, but there’s a distinct chance that their intervention will destroy us first.

Ron Paul Takes The Last Step Into Irrelevance

Earlier this week, former Presidential candidate Ron Paul finally decided to endorse a candidate for President, and he chose to pick the wackiest man in the room:

The Libertarian Party Candidate admonished me for “remaining neutral” in the presidential race and not stating whom I will vote for in November. It’s true; I have done exactly that due to my respect and friendship and support from both the Constitution and Libertarian Party members. I remain a lifetime member of the Libertarian Party and I’m a ten-term Republican Congressman. It is not against the law to participate in more then one political party. Chuck Baldwin has been a friend and was an active supporter in the presidential campaign.

I continue to wish the Libertarian and Constitution Parties well. The more votes they get, the better. I have attended Libertarian Party conventions frequently over the years.

In some states, one can be on the ballots of two parties, as they can in New York. This is good and attacks the monopoly control of politics by Republicans and Democrats. We need more states to permit this option. This will be a good project for the Campaign for Liberty, along with the alliance we are building to change the process.

I’ve thought about the unsolicited advice from the Libertarian Party candidate, and he has convinced me to reject my neutral stance in the November election. I’m supporting Chuck Baldwin, the Constitution Party candidate.

As you can probably tell from the fact that he doesn’t refer to him by name, Paul is obviously still miffed at the fact that Libertarian Party Presidential candidate Bob Barr declined to attend Paul’s bizarre four-party press conference two weeks ago and then issued his own challenge to Paul to join the Libertarian ticket rather than just endorsing the idea of voting for “any” third-party candidate.

So, there’s obviously something personal going on in the fact that Paul didn’t end up endorsing Barr, but that doesn’t make his endorsement of Chuck Baldwin any less troubling for libertarians who actually hoped his campaign, and the Campaign for Liberty, would amount to something.

As Kip Esquire notes, the Constitution Party is hardly libertarian in any sense of the word, as these excerpts from it’s platform make plain:

This great nation was founded, not by religionists, but by Christians; not on religions but on the Gospel of Jesus Christ. … The goal of the Constitution Party is to restore American jurisprudence to its Biblical foundations and to limit the federal government to its Constitutional boundaries.

So much for the separation of church and state, apparently.

The Constitution Party will uphold the right of states and localities to restrict access to drugs and to enforce such restrictions.

Libertarians for the drug war ? I don’t think so.

The law of our Creator defines marriage as the union between one man and one woman. The marriage covenant is the foundation of the family, and the family is fundamental in the maintenance of a stable, healthy and prosperous social order. No government may legitimately authorize or define marriage or family relations contrary to what God has instituted.

Again, so much for individual rights.

We reject the notion that sexual offenders are deserving of legal favor or special protection, and affirm the rights of states and localities to proscribe offensive sexual behavior. We oppose all efforts to impose a new sexual legal order through the federal court system. We stand against so-called “sexual orientation” and “hate crime” statutes that attempt to legitimize inappropriate sexual behavior and to stifle public resistance to its expression. We oppose government funding of “partner” benefits for unmarried individuals. Finally, we oppose any legal recognition of homosexual unions.

In other words, if Texas wants to put people in jail for engaging in oral sex, Chuck Baldwin and his theocratic friends have no problem with it.

Gambling promotes an increase in crime, destruction of family values, and a decline in the moral fiber of our country.

Nope, nothing libertarian there.

We particularly support all the legislation which would remove from Federal appellate review jurisdiction matters involving acknowledgement of God as the sovereign source of law, liberty, or government.

Cute the theocrats again.

We commend Former Chief Justice Roy Moore of the Alabama Supreme Court for his defense of the display of the Ten Commandments, and condemn those who persecuted him and removed him from office for his morally and legally just stand.

Because nothing says support for the rule of law like supporting a man who violated his oath of office, his duty as a judge, and his ethical standards as an attorney.

Pornography, at best, is a distortion of the true nature of sex created by God for the procreative union between one man and one woman in the holy bonds of matrimony, and at worst, is a destructive element of society resulting in significant and real emotional, physical, spiritual and financial costs to individuals, families and communities. We call on our local, state and federal governments to uphold our cherished First Amendment right to free speech by vigorously enforcing our laws against obscenity to maintain a degree of separation between that which is truly speech and that which only seeks to distort and destroy.

Apparently, Chuck Baldwin knows obscenity when he sees it and doesn’t like it very much.

So, Paulistianians, this is what the vaunted r3volution has come to. Your candidate has endorsed the nominee of a party that opposes the right of gays to marry, thinks the drug war is a great thing, and wants to restrict speech based on what it considers “obscene.”

That, my friends, is not freedom and liberty.

Kip, of course, is among those saying “I told you so”:

I was, along with a few select others, among the first to stand athwart yelling Stop!. We warned against this lunacy, this malignant fever that struck so many intellectually challenged “libertarians” who deluded themselves into thinking that Ron Paul was anything other than a majoritarian, neo-confederate theocrat (who engages in rank homophobia as a hobby).

We were right. You were wrong. We stayed true to our principles. You sold your souls for a bumper sticker and a press conference. Now welcome your new Constitution Party overlords..

As for the future, my advice to Paul supporters is this: By all means join the Constitution Party and vote for [Pastor] Chuck Baldwin. All we who saw through the Paul charade ask is that you do so with your eyes wide open. Know fully who and what you are voting for.

And please, for your sake and ours, stop calling yourselves “libertarians.”

Given what I’ve seen of the man Ron Paul says he’s voting for in November, I can’t say I disagree.

Update: Jack at The Crossed Pond makes this point:

[T]his is a disheartening development. Ron Paul’s endorsement of Baldwin is a disastrous, petulant, ill-considered act that taints his legacy and hinders any positive impact he might provide for the libertarian movement. He has, in either a fit of pique or a conscious revealing of his actual leanings, endorsed a true horror show. Rather than allow the slow healing of the libertarian rift by endorsing the odd and politically bumbling, but at least defensibly libertarian candidate Bob Barr, he has reopened the wounds by endorsing a “loopy ‘America is a Christian nation’ paleo-conservative” Rather than signal his continued opposition to the GOP foreign policy and economic agenda as well as rejection of fringe element mediocre candidates by remaining out of the endorsement business altogether, he has stated his support for a “Theocratic Homophobic Lunatic for President.” Rather than retain some semblance of legitimacy as a libertarian elder statesman and an alternative rallying point for a GOP opposition element in Congress, he has lessoned his cross cultural appeal and potential political leadership by endorsing a candidate with this abortion for a party platform.

And so, the r3volution ends. Not with a bang, not even with a whimper, but in much the same confused, poorly-planned manner in which the entire enterprise was run from the beginning.

Now, while it’s clear that some significant portion of Paul’s supporters will find the Constitution Party quite conducive to their beliefs, where do real libertarians go from here ?

Originally posted at Below The Beltway

Quote Of The Day: Hypocrite In Chief Edition

A two-fer today.

First, from our fearless leader about 4 months ago:

“Our policy in this administration — laws shouldn’t bail out lenders, laws shouldn’t help speculators.”

President Bush, May 19, 2008

And, second, from the Republican Party Platform, passed in convention only three weeks ago:

We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself. We believe in the free market as the best tool to sustained prosperity and opportunity for all.

Yea, sure you do.

Just Say No To The Bailout From Hell

While the rest of the politcal class debates the wisdom of John McCain’s non-supension suspension of his campaign, Libertarian Party Presidential Candidate Bob Barr seems to be one of only a handful of people out there saying we need to look at the bailout itself:

In the name of restoring economic confidence, the Bush administration is demanding unlimited authority to implement a massive financial bailout. The Secretary of the Treasury would become an economic dictator, empowered to re-engineer the economy as he sees fit. These powers fit Kim Jong-il’s North Korea, not the American republic.

The economy is in trouble, but the wrong policy could make things much worse. With the public deeply divided over the proposed bailout, and the future structure of our economy at stake, Congress must stop and take a deep breath before rushing such a far-reaching plan into law.

(…)

The federal government cannot eliminate financial losses and should not attempt to do so. It can only shift the burden — in this case from irresponsible borrowers, lenders and investors — to taxpayers. Keeping the walking dead on economic life support will only slow down necessary adjustments. The federal government’s principal responsibility at a time of financial stress should be to maintain liquidity for use by otherwise sound institutions.

Congress certainly should reject an unrestricted, economy-wide purchase of mortgages and mortgage-backed securities, as well as “other financial instruments” at the Treasury’s discretion. Interest groups already are lining up with their hands outstretched, including mortgage lenders and insurance companies, municipalities and foreign banks. The congressional Democrats even want to include home heating assistance and another wasteful “stimulus” package.

If the administration believes there are financial institutions so critical that their failure would put the entire economy at risk, then the president should identify those institutions and make the case for aiding them to Congress and, more important, to the American people.

(…)

“My first instinct was to let the market work, until I realized, while being briefed by the experts, how significant this problem became,” lamented President George W. Bush. So, he would turn capitalism into a government-protected enterprise and Uncle Sam into an ATM machine for economic failures. Congress must say, “No.” Why should we, the taxpayer, believe the people who got us into this mess when they say bailing them out is the only solution?

Despite his flaws as a candidate, Barr is, of course, quite correct about all of this.

Here he is talking about the bailout on CNN earlier today:

We all know what will happen here. Compromise will be reached in Congress and another $ 700 billion of taxpayer wealth will be wasted in an effort to keep a system that can barely sustain itself at this point in operation.

It might even work, temporarily.

At some point, though, we’re going to run out of tricks like this and then where will we be ?

Welcome to the U.S.S.A.

For those of us who value the concept of life, liberty, and property, there doesn’t seem to be much reason to be optimistic for America’s future. Last week we saw one government (taxpayer) bail out after another. The price tag seems to grow a couple of hundred billion dollars each day (depending on which figures one chooses to believe); by some estimates the taxpayers will be on the hook for over $1 trillion. According to the Libertarian Party, $1 trillion could buy the following:

• To buy everybody living in Los Angeles at least one Lamborghini Gallardo.
• To buy 88,052, 394′ custom mega yachts; enough to stretch around ¼ of the world.
• To buy everyone living in Belize and Malta a Manhattan apartment.
• To get half of the Democratic Party into a fundraiser for Barack Obama at the $28,500 admission price.
• To give one out of every two men in the United States a Men’s Presidential Rolex watch.
• To buy every woman in the United States a Tiffany Diamond Starfish Pendant.
• To get two Mitsubishi 73″ HDTVs for every household in America.
• To buy four copies of The Office: Season Four on DVD, to every person on earth.
• To send everybody in America on an all-inclusive vacation to Tahiti (and some people can stay a few extra days).

Anyway you want to look at it, $1 trillion is a lot of money ($3, 278 for every man, woman, and child in America).

And how do our so-called leaders wish to ultimately “solve” this problem which they have created? More government, of course! Joe Biden is calling on “the rich” to do their “patriotic duty” to pay more taxes, not only to pay for the already bloated federal government (which grew by leaps and bounds under the so-called compassionate conservative George W. Bush) but also to pay for the government programs that he and Barack Obama wish to impose on us (programs such as fighting global poverty among others).

But it gets even worse than that. The current Secretary of Treasury Henry Paulson has proposed that he should have the absolute authority to purchase any mortgage-related assets as he sees fit (obviously with our money). Section 8* of the proposal reads as follows:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Section 9 puts a time limit on this absolute power provision but even placing this much power in the hands of one person for a two-year term is a very frightening thought. Perhaps the one good thing about having power hungry politicians in congress in both parties is that they would likely not support this measure as it would take power away from them.

Welcome to the U.S.S.A. What’s left of our free market system is all but dead. While one can make a libertarian case for both John McCain and Barack Obama in certain aspects of their policy proposals, neither are what I would call champions of capitalism (to put it mildly). Personally, I don’t find the arguments for McBama to be persuasive. I will proudly support Bob Barr knowing full well that he will not win this election and knowing full well that whomever wins, we will be in for difficult times.

Is America’s best days behind her? Is there any way that we can restore our Republic to what it once was?

As always, the answer will depend on how “We, the people” will respond.

» Read more

Quote Of The Day — Treasury Bonds Lose AAA Status?

Well, that’s what the S&P rating service is discussing, but they do point out one crucial point allowing them to retain their place:

“As an advanced economy with almost no foreign currency debt — and with the ability to continue to borrow in its own currency — the U.S. ratings face little threat in the foreseeable future.”

That must be nice. I wish I could simply print money to pay off my debts…

A little lesson about government– If I could print money to pay off my debts, I’d worry a lot less about my spending habits. That incentive doesn’t change just because Congress makes the decision.

Quote of the Day: The “Don’t Say You Weren’t Warned” Edition

Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out.

Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

[…]

I hope today’s hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.

Ron Paul in the House Financial Services Committee, September 10, 2003

Hat Tip: Classical Revolution

Dr. No — Or How I Learned To Stop Worrying And Love The Fed

If I had photoshop skills, I’d be putting out a picture of Ron Paul smiling up* at Ben Bernanke throwing money out of helicopters… Unfortunately, I’m not an artist. So this will have to do…

Perhaps my predictions in early 2007 are starting to come true? We’re in an election year, and our next president (whoever it is) is about to walk into a shitstorm of 1930s proportions. The next President will be forced to “do something”, and to expect that President to do something positive instead of politically-palatable-but-destructive is naive at best.

More to come when I get a chance, because my initial predictions didn’t quite account for how difficult it would be for our economy to deleverage… A lot of people don’t understand what’s actually happening, so I’m going to do my best to explain it in simple terms– and try not to get it wrong, as it’s complex enough to make my brain hurt…

* No, Ron Paul wouldn’t be smiling up at Bernanke out of respect, it would be more out of a fatalistic delirium that all of us might be facing in the near future. Ron Paul was just prescient enough to see it coming and try to warn us.

Happy Anti-Federalist Day!

So, today is Constitution Day, a day to celebrate the ratification of the Constitution. Aptly, then, I’ve been reading John Ferling’s A Leap In The Dark, a history of the American Revolutionary period beginning in the 1750’s and ending with the peaceful transfer of power to Jefferson in the 1800 election. Over the last few days, I’ve been through the chapters on the battle to create and ratify the Constitution.

The book, which I recommend heartily, gives a strong human feel to the Revolution. Contemporary high-school history classes teach the Revolution as if it were a foregone conclusion, a natural progression of the transgressions by King George III on the colonies. In reality, it was always in doubt, and divergent factions within the colonies could have scuttled the Revolution at any point between the Stamp Act in 1765 and Yorktown.

Enter figures such as Samuel Adams and Patrick Henry, two true radicals committed to independence. Adams in particular was masterful during the days of 1770-1773– a time with little new development from the Crown to cause popular outrage– when he worked to keep the situation simmering. His leadership in the Boston Tea Party directly forced the British hand into the Coercive Acts, likely the point of no return for both sides. Henry entered the national scene thereafter as a Virginian delegate to the First Continental Congress, and his alliance with Samuel & John Adams helped to win his fellow colonists towards independence rather than reconciliation.

The American Revolution was a truly incredible feat, both for having defeated the British and for having ushered in a society unlike any of those in old Europe. Gone were the days of imperial government, of a titular nobility, and of subservience to faraway central governments who could rule with a heavy hand over the individual colonies’ (now States’) matters. Under the Articles of Confederation, thirteen independent States worked to decide matters of importance to all, but with the ever-present assumption that each was– and ought to be– independent of the others.

But although commerce was booming, and the life of the average American in their respective States was improving, not all was well. The Congress (and several States) had racked up enormous debt to fight the war and were vulnerable to outside attack by the powers of Europe. The nature of a one-State-one-vote Confederation between northern mercantilists and southern agrarian planters allowed those European powers to divide-and-conquer to get what they wanted from our national policy.

Several people, such as Samuel Adams and Patrick Henry, recognized that the Articles of Confederation were not working and needed to be revised. They understood that the American States were in jeopardy and would have trouble banding together against regional invasion if a change was not made. They were not, however, looking for a new central government with widespread power.

Enter James Madison, and his ideological cohort, Alexander Hamilton. “The Father Of The American Constitution” was sent as a delegate from Virginia to revise the Articles of Confederation, but he had other designs in mind. He wanted a national, centralized, sovereign government that would supercede the States, binding them into a singular entity. The “United States of America”, per his plan, would be more aptly described as the “United State of America”. He found himself with many like-minded souls at the convention (such as Hamilton) to “amend” the Articles. They moved far beyond the proposed revision of the Articles, and a completely new Constitution was written.

The battles between the Federalists and Anti-Federalists was joined. The Federalists suggested that without a new Constitution, the States would become client-states of Europe, severely limited and unable to protect their own interests from the European monarch’s divide-and-conquer tactics. The Anti-Federalists, on the other hand, saw the birth of a new government that would have the same sort of arbitrary and remote power against which they had just fought a war of Independence. Hamilton wanted a European-style government, destruction or complete subservience of the States, and widespread national powers. Patrick Henry disagreed:

If we admit this Consolidated Government it will be because we like a great splendid one. Some way or other we must be a great and mighty empire; we must have an army, and a navy, and a number of things.

When the American spirit was in its youth, the language of America was different.

Liberty, Sir, was then the primary object. We are descended from a people whose Government was founded on liberty.

Our glorious forefathers of Great-Britain, made liberty the foundation of every thing. That country is become a great, mighty, and splendid nation; not because their Government is strong and energetic; but, Sir, because liberty is its direct end and foundation.

We drew the spirit of liberty from our British ancestors; by that spirit we have triumphed over every difficulty.

But now, Sir, the American spirit, assisted by the ropes and chains of consolidation, is about to convert this country to a powerful and mighty empire.

If you make the citizens of this country agree to become the subjects of one great consolidated empire of America, your Government will not have sufficient energy to keep them together.

Such a Government is incompatible with the genius of republicanism.

The Liberty Papers bills itself as written by the heirs of Patrick Henry. Each contributor to this blog, of course, would have to determine for himself how much that description applies, but it is rather clear that the end result of the American republic was Hamiltonian, not what Henry would have wanted.

Much like Frost’s The Road Not Taken, the American Revolution was driven by radical men, blazing the path less traveled. The ratification of the Constitution was the true point at which the more conservative “governmental” members of the movement regained control and put it down the path well worn.

Today is a day to officially cheer the Madisonian/Hamiltonian vision of a great American empire, a vision today fulfilled by men like John McCain and the Washington set. Instead, I suggest you pause and ask yourself whether the Splendid government those men have produced is worth it. Ask yourself whether you would rather follow the path of Samuel Adams and Patrick Henry, or of a man like Hamilton who worked tirelessly to enhance and increase the power of the central government. Today, I will be cheering the Anti-Federalists.

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